OREANDA-NEWS. May 11, 2012. Devon Energy Corporation (NYSE:DVN) reported net earnings of USD 393 million for the quarter ended March 31, 2012, or USD 0.97 per common share (USD 0.97 per diluted share). This compares with first-quarter 2011 net earnings of USD 416 million, or USD 0.97 per common share (USD 0.97 per diluted share), reported the press-centre of Devon Energy.

Devon’s first-quarter 2012 financial results were impacted by certain items securities analysts typically exclude from their published estimates. Adjusting for these items, the company earned USD 427 million or USD 1.05 per diluted share in the first quarter of 2012. The adjusting items are discussed in more detail later in this news release.

Devon’s first-quarter 2012 earnings were significantly affected by unusually wide Canadian oil price differentials. Following the end of the quarter, Canadian oil differentials have begun to normalize.

Strong Oil Growth Drives Record Production
Total production of oil, natural gas and natural gas liquids averaged 694,000 oil-equivalent barrels (Boe) per day in the first quarter of 2012. This is the highest daily production rate in history from the company’s North American onshore properties and represents a 10 percent increase compared to the year-ago quarter. Record production from the company’s cornerstone development properties, including the Permian Basin, Jackfish, Cana-Woodford and Barnett Shale, drove the strong first quarter performance.

Devon’s first quarter liquids production increased for the sixth consecutive quarter to 256,000 Boe per day. This growth was led by a 26 percent year-over-year increase in oil production.

Sales of oil, natural gas and natural gas liquids, before the impact of hedges, increased 3 percent to USD 1.9 billion in the first quarter of 2012. Cash settlements related to oil and natural gas hedges increased revenues by USD 158 million or USD 2.50 per Boe in the first-quarter 2012.

Marketing and midstream operating profit was USD 112 million in the first quarter of 2012. This was a 7 percent decrease compared with the first-quarter 2011. The decrease was attributable to lower natural gas and natural gas liquids prices.

Permian Basin Activity and Production Growth Lead Operating Highlights
Devon continued to aggressively ramp-up activity in the Permian Basin in the first quarter. Since year-end the company has added five operated rigs and now has 21 rigs running in the basin.

Permian Basin oil production increased 32 percent over the first-quarter 2011. Liquids production accounted for 76 percent of the 56,000 Boe per day produced in the Permian Basin during the first quarter.

Additionally, Devon recently enhanced its leasehold position in the Permian Basin by assembling a 500,000 net acre position in the Cline Shale light-oil play. The company is currently drilling its first horizontal well in the Cline and expects to drill 15 wells in 2012.

Also in the Permian, Devon completed 16 operated Bone Spring wells in the first quarter. Initial daily production averaged 580 Boe per day per well.

Net production from Devon’s Jackfish 1 and Jackfish 2 oil sands projects in Canada averaged a record 46,000 barrels per day in the first quarter, representing a 55 percent increase over the year-ago quarter. The company’s Jackfish 2 production is now at 21,000 barrels per day and will continue to ramp-up throughout 2012.

Construction of Devon’s third Jackfish oil sands project is now approximately 30 percent complete. Jackfish 3 is expected to produce 35,000 barrels per day before royalties for more than 20 years. Plant startup is targeted for late 2014.

The company’s Cana-Woodford Shale production averaged a record 271 million cubic feet of natural gas equivalent per day in the first quarter of 2012. Liquids production averaged 13,000 barrels per day, an 80 percent year-over-year increase.

Net liquids production from the Barnett Shale increased more than 20 percent compared to the year-ago quarter to 52,500 barrels per day, accounting for 23 percent of total Barnett production. In aggregate, net production reached a record 1.37 billion cubic feet of natural gas equivalent per day in the first quarter.

Devon brought seven operated Granite Wash wells online in the first quarter. Initial production from these wells averaged 1,650 Boe per day. The company has an average working interest of 73 percent in these wells.

In the first quarter, the company continued to capture acreage in new oil-focused opportunities. Devon has now contracted for or leased 250,000 net acres in an undisclosed position. The company is targeting 500,000 net acres in this play.

Cost Containment Efforts Partially Offset Rising Costs
First-quarter 2012 expenses increased compared to the year-ago quarter due to rising oilfield service and supply costs. Compared to the first quarter of 2011, the company’s total pre-tax cash costs increased 5 percent to USD 13.80 per Boe. The company’s successful cost management efforts and efficient operations partially offset the full impact of industry inflation and a shift towards oil projects. In general, oil projects are more expensive to develop and have higher operating costs than gas production.

Lease operating expenses (LOE) were USD 514 million in the first quarter. On a unit of production basis, LOE increased 9 percent compared with the first-quarter 2011 and was 2 percent higher than the fourth-quarter 2011. The increase in LOE reflects rising industry costs coupled with increased activity levels in oil-focused basins.

Taxes other than income decreased 6 percent to USD 102 million in the first quarter of 2012. The year-over-year decrease was driven by lower ad valorem and production taxes.

Interest expense for the first quarter totaled USD 87 million, a USD 6 million increase over the first quarter of 2011. Higher average debt balances drove the increase.

First-quarter general and administrative expenses were USD 168 million, or USD 2.67 per Boe. This compares with USD 2.29 per Boe in the first quarter of 2011. Higher personnel costs were the largest contributor to the increase. Devon has increased the size of its workforce to support its expanding exploration and development activity.

Compared with the first-quarter 2011, depreciation, depletion and amortization expense (DD&A) increased 21 percent to USD 10.78 per Boe. Inflation in industry costs and increased investment in oil-focused projects drove DD&A expense higher.

Balance Sheet and Liquidity Remain Strong
In the first quarter of 2012, Devon generated cash flow before balance sheet changes of USD 1.4 billion. On a per share basis, this represents a 3 percent increase in cash flow compared to the first-quarter 2011. At March 31, 2012, the company’s cash and short-term investments totaled USD 7.1 billion, and its net debt to adjusted capitalization was 15 percent.

Devon Adds Oil and Gas Hedges in 2012 and 2013
The strong oil price environment has provided Devon the opportunity to add attractive oil hedges for 2013. The company has entered into various swap and collar contracts to hedge 72,000 barrels per day of oil production. Of this total, 31,000 barrels per day are swapped at a weighted average price of USD 104 per barrel. The remaining 41,000 barrels per day utilize costless collars with a weighted average ceiling of USD 117 per barrel and a floor of USD 91 per barrel. For the remainder of 2012, the company has 109,000 barrels per day of oil production hedged, or roughly 70 percent of forecasted oil production, at a weighted average floor price of USD 95 per barrel.

The company has also recently bolstered its natural gas hedging position. For the remaining three quarters of 2012, Devon has approximately 1 billion cubic feet per day protected at a weighted average floor price of USD 4.42 per thousand cubic feet. This represents about 40 percent of Devon’s 2012 forecasted gas production.

Non-GAAP Reconciliations
Pursuant to regulatory disclosure requirements, Devon is required to reconcile non-GAAP financial measures to the related GAAP information (GAAP refers to generally accepted accounting principles). Cash flow before balance sheet changes, net debt and adjusted capitalization are non-GAAP financial measures referenced within this release. Reconciliations of these non-GAAP measures are provided on page 11.

Items Excluded from Published Earnings Estimates
Devon's reported net earnings include items of income and expense that are typically excluded by securities analysts in their published estimates of the company's financial results. The following tables summarize the first-quarter 2012 effects of these items on earnings and cash flow.